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French Economic Stagnation
Karina Vasavada
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This paper is posted at Sound Ideas.
http://soundideas.pugetsound.edu/economics theses/101
French Economic Stagnation
Karina Vasavada
Abstract
This analysis explores the reasons behind French economic stagnation and
discusses why this stagnant state is seemingly irrevocable. Based on a detailed look at the
economic regime changes, market restructuring, and the resultant policy direction
changes in France starting post-World War II, I contend that the reason for France’s
current economic stagnation was their decision to join the EU, resulting in the shift away
from dirigisme, a government interventionist economic approach, and toward a market
oriented economy. While this assertion goes against the prevalent economic assumption
that the market can efficiently govern itself, given the trajectory of the French economy
post-market orientation this assumption does not hold true. Finally, as a result of the
attenuating effects of market restructuring, the state promised excessive social protections
to its citizens paralyzing future administrations in the way of policy reforms. Each
subsequent attempt has resulted in either minimal change or uprisings and government
acquiescence, thereby making stagnation inexorable.
Introduction
Post-World War II, the European economies were in shambles. For France,
however, that did not last long. The French economy bounced back quickly, hitting its
peak during the post-World War II economic boom termed “Les Trentes Glorieuses”
(Rabault, 2011). The swift economic recovery was due in part to its “ideal…post-war
state capitalism” (V. Schmidt, 2003). Characteristic of this post-war state capitalism was
the heavy emphasis on state-led intervention in the economic system known as dirigisme
(Clift, 2006; Levy, 2008). The first half of this regime lasted from 1945-1968 and was
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predicated on the state acting as guiding factor in economy activity, funneling resources
away from the labour market and consumption and toward industrial investment (Levy,
2008). The second half of dirigisme, from 1968-1983, was characterized by the state
shifting their policy direction and subsequently undertaking policies that supported the
labour market and consumption while slowly breaking away from industrial investment.
The end of the prosperous era of dirigisme was marked by the “1983 U-turn”
(Clift, 2006; Cohen, 2007; Levy, 2005) when former President François Mitterrand
decided to completely dismantle the dirigiste system. This replaced state-led intervention
with the control and constraints enacted by the European Union (Levy, 2008). The new
economic regime that took over was what I term the social pacification (also known as
social anaesthesia) state, characterized by economic liberalization yet maintaining an
emphasis on social and labour market policies (Levy, 2005). The government emphasized
the welfare of the population and tried to protect those affected by the restructuring of the
market. While the citizens reaped the benefits in the beginning, toward the end of the
regime there was a general awareness that the initial benefits negatively affected
economic growth, which in turn was cause for a change. In 2002, the newly elected
Chirac administration was faced with the task of reforming the social pacification
state(Levy, 2005) into one in which French society would return to prosperity.
From the end of social pacification in 2002 to today, the French economy has
become characterized by difficulties in exiting economic stagnation, with unemployment
at an all time high, the government deficit spiraling out of control, and economic growth
at a standstill (Carter, 2014). While efforts have been made by various presidential
administrations, no real intended change has come to fruition. In taking a hard look at the
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current economic situation in France, one has to wonder how the country went from postWorld War II prosperity to an economic stalemate. Through an analysis of the economic
transformations in France starting post-World War II, I intend to answer the question of
how France’s economy assumed its stagnant state. To answer the question, this thesis
takes a detailed look at the policies intended to control for the detriment of market
restructuring.
Before we turn to a survey of policies and economic decisions, we want to gain a
better understanding of the trajectory of the economy from prosperity to stagnation. The
most important indicator of economic stagnation is the decrease in the annual growth
rate. Below is Figure 1.1 charting the changes in the economic growth rate (rGDP) from
1960 to 2015.
Figure 1.1
8
Annual Growth Rate (rGDP %)
6
4
2
0
-2
-4
(Data source OECD)
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As Figure 1.1 demonstrates, the current state of economic growth in France is
well below that achieved during dirigisme in 1960. What can be observed is that
economic growth slowed significantly after 1983, remaining approximately between -3%
and 4% from 2002 onwards, being just above 0.18% as of 2014. Across a survey of
literature pertaining to this subject, research indicates that much of the trouble in other
areas also arose after the break from dirigisme in 1983. In an overview of France’s
economic performance, we see that since 1983, the unemployment rate has remained
high, government deficit has steadily increased, and the inflation rate has continually
decreased [ref. Appendix i-ii, Figures A.0-A.3]. Unemployment has been more volatile,
experiencing spikes and dips starting from 1983, and today it is nearing the previous peak
at approximately 10% while inflation has experienced a steady decline reaching a rate of
0.5% as this was the primary objective of the EU(Howarth, 2005) . Government
expenditure and revenue have both increased, but expenditure has experienced a
proportionately greater increase resulting in increased government deficit.
Now with our, understanding the trajectory of the French economy, we turn to a
survey of literature that contributes to my analysis. Many researchers have taken an
analytical approach, studying the economy over time and making projections for the
future direction of economic policy. While this paper follows a similar analytic approach,
the projections for the future indicate that there is no solution and that France will not be
able to exit stagnation.
This review is separated into three distinct sections: first two will be a discussion
of the dirigiste regime and the subsequent social pacification state, respectively, detailing
the characteristics, goals, and policies of/under each. Additionally, these two sections will
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identify economic “missteps” that I attribute to the problem of stagnation, to be further
discussed in the proceeding section. The third section will be comprised of my analysis
and will furnish an explanation for why the French economy is stagnant.
Dirigisme: 1945-1983
The dirigiste regime marked the period of the most rapid growth in the French
economy (Carré, Dubois, & Malinvaud, 1975) . As Lynch argues, the growth in the
economy was due to a more optimal allocation of resources stating, “…there was a
massive shift in resources from traditional, stagnant activities (mainly agriculture) to the
modern sectors of industry and urban services” (Lynch, 2006). In conjunction with stateled interventionism, another important attribute of this system is the policy direction
termed voluntarisme, which indicates the importance of policy-makers’ discretionary
actions (Clift, 2006). Dirigisme is also classified as France’s first attempt at establishing a
“modern capitalist economy in the absence of a modern capitalist class” (419) (Levy,
2008) in that the government was intervening and investing to promote long-term
economic growth.
Part I: 1945-1968
The early part of dirigisme was predicated on the attempt to industrialize and
modernize industry while maintaining high production at a low cost, rather monopolizing
on economies of scale (Levy, 2008). With the state acting as the guiding force for
economic activity, the government’s policy direction was geared toward an economic
emphasis, channeling investments into the industrial sector and away from labour and
consumption (Levy, 2008; Rabault, 2011). This allocation of financial capital was made
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possible because of an inflationary growth strategy called “the inflationist social
compromise” (Clift, 2006) , concentrated on deficit spending, loose monetary policy and
periodic aggressive currency devaluations (Levy, 2005; Levy, 2008). Additionally, this
policy made for wage and price freezes and restraints on demand, allowing financial
capital to flow into industry (Lynch, 2006). During this period, the state acted as the
source of national investment employing deficit spending to promote long-term economic
growth as opposed to short-term consumption. To this end, the investments that resulted
were precisely what helped to rebuild the French economy post-World War II, bringing
France’s burgeoning industrial sector into a leading position in the world market as a
producer of “nuclear energy, high speed trains and digital phone switches” (Levy, 2008).
Conversely, this policy direction also caused inflation to begin to fluctuate in an upward
direction, as can been seen in Table 1.1 below.
Table 1.1
(%)(
rGDP (%)
Inflation
rate (%)
1961
1962
1963
1964
1965
1966
1967
5.51
6.67
5.35
6.52
4.78
5.21
4.69
2.41
5.25
4.94
3.23
2.71
2.57
2.82
(Source OECD)
Additionally, due to the emphasis on allocating resources toward industrial
investment, labour and welfare costs were maintained at a relatively low rate, which
meant that social spending was held to a minimum (Levy, 2008). The containment of
excessive welfare spending was due, in part, to the reelection of President Charles de
Gaulle, and his appointment of Jacques Rueff as his economic advisor in 1958 (Bliek &
Parguez, 2008) . Rueff was a huge proponent of dirigisme with his belief that state
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intervention is necessary to the end of political and economic liberalization (Bliek &
Parguez, 2008) . Rueff’s economic thought demonstrates a stark contrast to the widely
accepted economic assumption that the market can and should successfully allocate
resources without the help of an external authority. However, contrary to the popular
assumption, his policy direction was an economic success.
By the time of his appointment, the economy had recovered enough such that
France’s low capital stock produced a high enough rate of return to prime France’s
economy for growth. As can be seen in Table 1.1 above, the growth rate reached 5.51%
in 1961, just three years into Rueff’s term. The rapid growth rate achieved during this
period are attributable to Rueff’s pursuit of economic stability through his economic
goals, as rebuilding the economy was no longer necessary.
One of his first goals was to keep excessive spending down, which he argued
could be accomplished by the government living within their means, or rather not
spending outside of the financial capital that they possess. Furthermore, this idea would
help to keep inflation rates low and contain public debt. As can be seen in Table 1.1
above, Rueff successfully brought the inflation rate down from 5.25% in 1962 to 2.82%
in 1967. One of his pillars was founded on the idea that consumption is a barrier to
effective investment and that wage deflation would lead to a positive trade balance,
resulting in higher public saving (Bliek & Parguez, 2008) . Additionally, he regarded
inflation as one of the largest problems facing the state and therefore, to avoid increased
inflation, the state should only finance public spending through tax revenue (Bliek &
Parguez, 2008) .
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The state followed the Rueff’s platform and held wages down to promote and
maintain industrial investment(Levy, 2008). As a result, this expanded the labour force
and allowed for resources to move into the industrial sector, promoting increased
productivity. Subsequently, France attained the peak growth rate of 6.52% in the 60s as a
result of a variety of state policies with the goal of increasing the productivity of large
firms, global competitiveness and protecting the domestic markets (Hancké, 2002).
Though economically successful, this platform gave rise to a body of dissatisfied students
and workers, causing the largest social revolution that France had ever faced in May of
1968. The policies the government implemented to favour industrial growth resulted in
increasingly lower wages and sub-par working conditions in conjunction with an uneven
distribution of wealth due to the regressive treatment of public finance, thereby
provoking the strikes and protests that ensued (Levy, 2008). The result of the protests was
the government becoming exceedingly conflict-averse, backing down and acquiescing the
public’s demands at the first sign of dissatisfaction (Levy, 2005; Levy, 2008) .
Short-lived were the days when the government implemented policies to favour
industrial investment and modernization, evidenced by the resultant shift in France’s
economic goals in 1968. The earlier part of dirigisme emphasized an economic frame of
thought, favouring the growth of the economy over the welfare of the population
(Ancien, 2005). The transition to the latter part of dirigisme produced a shift in the frame
of thought as well as the ultimate shift toward a market orientation, rather creating a
modern capitalist economy with the reduction of government involvement in industry, to
control for uneven taxation and reunify the working class. A focus on labour market
policies and fostering consumption was the policy direction that was intended to reduce
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the marginalization of the population (Levy, 2008). While economists argue that a market
orientation is the ideal state for an economy, I view the change in the government
investment decision as first “misstep” toward current economic stagnation.
Part II: 1968-1983
President Charles de Gaulle stepped down in 1969 giving way to the rise of the
Giscard administration and the transition to the latter part of dirigisme (Levy, 2005;
Levy, 2008) . The new emphasis was on a social framework, this time channeling deficit
spending away from long-term investment and toward short-term consumption for the
benefit of the population (Levy, 2008). The social emphasis was a product of both the
industrial restructuring that occurred as a result of the trajectory toward the creation of a
capitalist economy as well as the social revolution in 1968. The French government was
cognizant of the fact that many people would lose their jobs, and as a result, welfare
benefits were created to soften the blow and take an ‘early prevention’ approach to public
unrest (Palier, 2008). Essentially, the government ultimately put too much heart into their
social policies and not enough thought into long-term effects of excessive expenditure,
promising the French citizens extensive social protection from economic restructuring,
which subsequently augmented their expectations and now poses the main obstacle in
exiting stagnation.
Among the first policies put in force was the “extension procedure” characterized
by a rapid increase in the minimum wage (Levy, 2008). The goal of this policy was to
increase the benefits for labour and control for the projected job loss of further
restructuring. With this policy, unemployment benefits increased to cover 90% of
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previous income for a maximum of one year of unemployment. In addition, the lay-off
policy was adjusted to require approval for any lay-offs as a result of economic problems
(Levy, 2008). The extension procedure provided for increased job and unemployment
security, however it also caused the first drastic increase in public spending, against the
real financial assets the state possessed (Cohen, 1995; Levy, 2008). This was the second
misstep in the direction of stagnation.
A subsequent policy measure was taken to reverse the effects of the recession that
hit in the 1970s. This was a counter-cyclical expansionary fiscal policy characterized by
the reallocation of the budget to provide income to lower social groups to the end of
promoting investment, creating jobs, and reducing unemployment (Clift, 2006). The
result, however, was less than ideal causing a decline in revenue for the state and creating
a fiscal imbalance. Furthermore, the government maintained their high levels of
spending, in spite of the loss of revenue, propelling the state into further public debt
(Levy, 2008), with expenditure at 157153.9 million euros and revenue at 150892.9
million euros in 1978. Moreover, the state was unable to implement any policies to
reduce the minimum wage and suspend the funding of the lower social groups, lest that
produce another social revolution, which the government was not equipped to handle
(Levy, 2008).
The third and final misstep leading directly to the progressive economic decline
came with the election of the Mitterrand administration in 1981. President Mitterrand
played a large role in deviating from the trajectory toward the market capitalist
orientation due to an aspect of his policy platform that emphasized revitalizing industrial
policy and reestablishing growth and employment by protecting faltering industries and
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regaining control of the domestic markets (Bliek & Parguez, 2008; Levy, 2008) . He
began the process by re-implementing a voluntarist industrial policy, nationalizing
industrial conglomerates and banks to save the industrial sector (Clift, 2006; Levy, 2008).
Due to the previous bailout plan of nationalizing bankrupt industries under the Giscard
administration, Mitterrand faced numerous obstacles in the way of shifting resources
from the traditional sectors to the newer ones(Levy, 2008). Ultimately, Mitterrand’s
promise to save the domestic markets through an industrial revitalization forced him to
continue along the path of reallocating resources toward these industries. His overzealous
promise resulted widespread misallocation of resources to sectors that clearly presented
no strategic advantage for France, such as the bankrupt steel industry.
The ideas of the Mitterrand administration were well founded, but the results were
less than desired. The subsequent policy direction was meant to pacify the general public,
as the restructuring of industry resulted in a social upheaval due to increased
unemployment. President Mitterrand took measures to buy social peace, subsidizing
firms that were spiraling toward bankruptcy as well as protecting those who lost their
jobs through economic restructuring (Levy, 2008). Not only did this continue to increase
the welfare expectations of the public, but it also marked an exceedingly inefficient
distribution of capital. Furthermore, because the firms were so extensively subsidized, it
eventually became more lucrative for the state to pay people not to produce.
To further the depreciation of the French economy, the desire to create a single
European market began to impose constraints on French policymakers (Cohen, 2007).
From the 1980s onwards, the once “industrial powerhouse” (218) was slowly rerestructuring to prepare itself for the EU, subjecting itself to the regulations that their
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economy was no longer prepared to adhere to. Thus, the decline of dirigisme became
imminent. Government spending began to rise at an increasingly rapid rate, and, as
demonstrated below in Table 1.2, the inflation rate was excessively high at 9.46% while
economic growth began to slow reaching a rate of 1.26% in 1983. As a result, President
Mitterrand finally began to realize that the dirigiste regime was beyond repair.
Table 1.2
1968
1969
1970
1971
1972
1973
1974
1975
1976
rGDP(%)
4.26
6.99
6.91
5.35
4.54
6.31
4.29
-0.98
4.31
Inflation
Rate (%)
4.55
6.04
5.85
5.40
6.06
7.38
13.65
11.69
9.63
1977
1978
1979
1980
1981
1982
1983
rGDP(%)
3.45
3.98
3.56
1.59
1.08
2.51
1.26
Inflation
Rate (%)
9.49
9.25
10.65
13.54
13.33
11.98
9.46
(Source OECD)
Social Pacification: 1983-2002
Exiting this era of economic success turned economic turmoil; France entered a
period called social pacification. Industrial relations were dismantled and decentralized;
giving way to a weaker, locally regulated enterprises as opposed to the government
regulated industry that was present before (Hancké, 2002). This regime presented a
variety of extensive policy changes and a further emphasis on social protection,
continuing the slowing of economic growth. However, the primary reason for the
decision to exit dirigisme and enter into social pacification was influenced by the desire
to join the European Union. Talks about creating the EU had started just after the war to
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prevent Germany from deviating again, and France was a major player in the discussion
and creation. The primary goal of the European Union was to establish a cohesive fiscal
and tight monetary policy base across the member states, which involved having an
economy that was set up for exterior regulation and not one that was predicated on the
discretionary actions of the individual government. While the previous Giscard
administration was successful in beginning to shape such an economy, Mitterrand’s
decision to turn back toward industrial investment halted and reversed any progress that
had been made. Due to the nature of dirigisme–the government interventionist
framework–France had a great distance to travel in order to create an economy that was
ready for exterior regulation, as was to be imposed by the EU. To begin to accomplish
this objective, France first had to transform their economy into one that was suited for the
EU regulations, which meant dismantling every aspect of dirigisme, specifically
eliminating governmental economic control (Clift, 2006; V. A. Schmidt, 1993).
The first break from dirigisme and attempt to reform the economy into one that
followed EU standards was aimed at controlling inflation in 1983. Figure 2.1
demonstrates the changes in France’s inflation rate, which, when exiting dirigisme, was
13.3% in 1981 reaching the ultimate rate of 12% by the end of 1982, thus tasking them
with the initial objective of disinflation.
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Figure 2.1
Inflation Rate (%)- End of Dirgisime
16
14
12
10
8
6
4
2
0
1978
1979
1980
1981
1982
(Data source OECD)
The EU’s decision was to implement a policy promoting competitive disinflation
as opposed to the previous “inflationist social compromise”, as aggressive devaluations
were no longer possible due to the regulations of the EMS (Clift, 2006; Levy, 2008; V. A.
Schmidt, 1993). The objective was to keep France’s inflation rate below that of their
competitors to maintain a strong value for their currency. Through austerity measures, the
de-indexation of wages, and tight monetary policy, contrary to the previous loose
monetary policy and deficit spending, France successfully managed the inflation rate,
recording one of the lowest in Western Europe in the 1990s [ref. Appendix ii, Figure
A.4] (Levy, 2005). At this point, France had met the criteria that the EU initially set.
Although inflation was contained, the same could not be said for the budget, as no cost
was spared in deflationary measures (Levy, 2005; Levy, 2008).
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The EU’s secondary goals were to ameliorate unemployment and promote
economic growth (Howarth, 2005) , two problems that persisted in France towards the
end of dirigisme [ref. Appendix iii, Figures A.5 & A.6]. However, because President
Mitterrand was dedicated to aligning with the EU and the European Monetary System
(EMS), France had to tackle the issues that the EU deemed important to be able to
become a member state, instead of addressing the prevalent domestic problems of
unemployment and decreased economic growth (Clift, 2006; Levy, 2005; Levy, 2008) as
a result of Mitterrand’s steps away from the market-economy. This was another misstep
as France began to ignore the issues that have become increasingly prevalent today.
The next two steps toward breaking from dirigisme and moving toward a EU
regulated economy were meant to stop French government intervention, specifically
pertaining to their involvement in industry. While at the beginning of his administration
François Mitterrand nationalized industry, the subsequent step was expansive
privatizations, leaving only energy production, public transport, and weapon fabrication
as responsibilities of the state (Clift, 2006; Levy, 2008). As industrial promotion slowed,
so did the economic performance of France. This was another misstep, guiding France
toward stagnation. Subsequently, Mitterrand put an end to government assistance for
struggling industries by reducing the bailout budget to control the government deficit
(Levy, 2008). This measure was intended to create industries that were “too big to fail”
(Levy, 2005), allowing firms to become independent, unionize and raise their funds while
decreasing their dependence on governmental assistance (Levy, 2008). At this point,
dirigisme had virtually disappeared, and state-led intervention was no longer a part of
France’s economy. As a result, corporate profitability increased and for a brief period of
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time France was effectively able to abide by the EU’s 3% deficit limit rule. However, the
lack of a bailout budget caused a wave of bankruptcies for struggling industries, leaving
widespread firm failures in its wake, resulting in an unemployment rate that increased
from 7.4% in 1981 to 9.53% in 1984. Although these first measures were initially
successful, the long-term effects started the path toward a widespread government deficit
and France’s ultimate inability to abide by the EU’s deficit rule (Howarth, 2005) .
Having initially ignored unemployment and the welfare of the general population,
the state was now tasked with increasing social and labour market provisions to control
for their failures in the labour market as they were now a part of the EU (Levy, 2008).
The next series of policies were implemented to provide a cushion for the attenuating
effects of market restructuring, such as firm failures and increased unemployment, and to
prevent another social revolution as was seen under the DeGaulle administration.
The first policy implemented, termed “conversion poles”, made the government
responsible for providing subsidies to retrain workers, modernize industry, and clean up
old factories (Levy, 2008). To control for unemployment under the conversion poles
policy platform was a reduced age requirement for retirement, age 50, to receive full
pension benefits. The idea was that with more people retiring, more, younger people
could enter the work force (Levy, 2005). However, this policy measure actually disincentivized workers from continuing to work past age 50, causing only a third of the
labour force to still be gainfully employed at age 60. Not only did this cause the
government deficit to increase, but also production from the labour force slowed.
To further these effects, two additional social protections were created– revenue
minimum d’insertion (RMI) and couverture maladie universelle (CMU), also known as a
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guaranteed minimum income and universal healthcare (Clift, 2006; Levy, 2005; Levy,
2008). Both of these were created in the face of an increased unemployment rate and
disgruntled citizens with sufficient education who were not awarded any income or
healthcare coverage due to their lack of employment. Again, this was to control for a
social upheaval. The effects were a pacified, yet increasingly demanding public, and a
qualified workforce with no incentive to find work due to increased unemployment
benefits. Naturally, what was observed was decreased production and slowed economic
growth. Finally, to solidify the increasing public debt, the workweek was changed into
the “socialist work week”, requiring only 35 hours a week (Levy, 2005). This was a result
of the transition from “une société de consommation” to “ une société de loisirs”, in other
words, a society predicated on consumption to a society that focused on leisure (Rabault,
2011). This transformation further augmented public spending, increasing the
government debt due to the necessity for cost shuffling (Clift, 2006).
Each of these policies contributed to increased government spending on social
protection, which led to increased citizen expectations and government deficit [ref.
Appendix iv, Figure A.7]. These two consequences are what I contend are the obstacles
to effective reforms and exiting stagnation.
Ultimately, the attenuating effects of the social pacification state were recognized
not only by analysts looking back on the French economic changes, but also by citizens
and the government toward the end of the era (Levy, 2005). While this regime did begin
to reduce the costs of dirigisme, it incurred costs of its own, exacerbating previous
problems, such as unemployment, and creating new and enduring problems of its own,
such as the government’s inability to reform (Clift, 2006; Cohen, 2007; Levy, 2005).
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From here on out, the economy was stagnant, characterized by sluggish growth, high
unemployment, and a ballooning government deficit (Carter, 2014; Levy, 2005) [ref.
Appendix iv-v, Figures A.8-A.10].
Where the literature ends: Stagnation
My research ends about six years prior to today, when the economy truly
presented its perpetually stagnant state that currently exists. In contrast to other analysts’
positions, this thesis comes from a more reflective standpoint in that I have witnessed the
trajectory of the economy since stagnation. Additionally, the projections that many
economists have made in terms of the direction of the French economy have never come
to fruition, as their economic situation has not changed since stagnating.
The next section of this paper synthesizes all of the above policies and culminates
in an explanation for the stagnant state of the French economy. Below is Table 3.1,
which compares the components that classify a stagnant economy across the various time
periods discussed in this paper. This will be a useful tool in visualizing my analysis.
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Table 3.1
Economic Growth
(rGDP)
Unemployment
Inflation
Deficit
4.25%
(Not recorded
until 1980)
4.5%
(Not recorded
until 1983)
1.26%
7.9%%
9.5%
-2.0%
1.12%
8.7%%
1.9%
-3.10%
Today, 12/2015:
0.18%
10.60%
0.5%
-4%
Peak
12.50%
10.80%
18.80%
-1.50%
Trough
-3.95%
7.20%
-0.70%
-7.50%
Dirigisme Part I:
1945-1968
Dirigisme Part II:
1968-1983
Social Anaesthesia:
1983-2002
(Source OECD)
Analysis
The general assumption in economics is that the market is facilitates the effective
allocation of resources and that the government does not necessarily have the
responsibility of guiding economic activity. While in many cases this assumption holds
true, in the case of France the economic period in which the economy reached maximum
prosperity was during dirigisme, when the government acted as the guiding force for
economic activity characterized by state-led economic intervention. As this thesis argues,
the explanation for the current state of the French economy was due to the shift away
from dirigisme and the resulting policy changes to transform the economic system, rather
ending government involvement in industry. The first misstep was the change from
industrial investment to investment geared toward consumption and the labour market.
Resources were no longer promoting industrial growth therefore production slowed
sufficiently because the government no longer protected industry. France had previously
attained a growth rate of 5.5% in the 60s, but the realized need for a market orientation to
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become a player in the European economy caused them to ignore the importance of
sustaining a healthy level of economic growth. Contrary to the economic belief in a free
market economy being the optimal way to allocate resources, do not think that this was
the ideal direction for France to go in as growth slowed when the government exited
industry.
I attribute current French economic stagnation to Mitterrand’s decision to join
with the EU (Levy, 2005). Though this is not singularly attributable to Mitterrand
himself, the inefficiencies of dirigisme as a product of the shift from an investment focus
to a consumption focus as well as his attempts to revert to the initial goals of the regime
led to his choice to succumb to the external pressures of the European Union (Levy,
2008). Despite France’s role in its creation, the EU required the full-on attack and
dismantling of the French economic system, i.e. the dirigiste regime, which was the
mistake that propelled France into stagnation. In theory, joining the EU should have
reduced France’s deficit spending, as it required extensive fiscal responsibility to abide
by the EU’s 3% rule. However, the effects were just the opposite as evidenced by the
increase in deficit spending for short-term consumption, rather on social protections, after
the 1990s. The reason this result was not realized was due to Mitterrand’s steps
backward, trying to reverse the changes toward a market-oriented economy and his initial
promise to revitalize industry and regain control of the domestic markets. The economy
was already on the direct path to be a part of the EU, but the difficulties in re-reallocating
resources caused useless spending to save un-strategic industries, ultimately further
propelling France into economic turmoil. Therefore, when Mitterrand decided to, once
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21
again, create a market-oriented, EU acceptable economy, the economic situation had
worsened to the extent that the only viable solution was to dismantle dirigisme.
This transition proved to be more difficult than anticipated because the French
economy was set up for the implementation of discretionary policies, having the ability to
adapt to different economic problems. Characteristic of the EU was tight monetary
policies that were inflexible, a level deficit requirement of 3% and spending to be kept to
a minimum. France was not only tasked with adapting their policies, but also changing
their regime in its entirety. This was not something that would come easy, and their lack
of forethought caused them to incur more problems than were previously existent.
Furthermore, the EU had their own agenda, placing the problem of inflation above other
problems such as economic growth and unemployment. As a result, France was forced to
neglect these pertinent issues facing the domestic economy. This forced negligence set
France’s economy up to enter into stagnation as they were unable to adjust the domestic
problems until they reformed their economy into one controllable by the EU.
Because the government was aware of the detrimental effects of EU market
restructuring, they began to put too much heart in their policies to avoid social rebellion.
As a result of the revolution in 1968, the government began to back down at any
indication of conflict. This is something that ultimately has trapped the state, in that
currently, whenever there is unrest, the citizens go on strike and ultimately the
government acquiesces the demands of the people. This is a point of weakness in the way
of effective reforms. In looking at social spending as part of GDP, it was only 21.3% in
1980, compared to 26.5% in 1990, and 29.5% in 1998, thus transforming France into a
welfare state (Levy, 2005). Other administrations have tried to ameliorate this image,
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22
such as the Sarkozy administration in their attempt to reform their pension plan. While
the reform was a success, it was not nearly enough to bring down the public debt and
ultimately did not have any lasting effects.
Furthermore, with increased social protection needed to cover for increased
unemployment, the government had to continue to partake in deficit spending for short
run consumption. However, the revenue from income taxes, which Rueff argued was the
only money that the government should be spending, decreased drastically because of the
amount of people out of work, thereby perpetuating the deficit. Unfortunately, the
government was paralyzed by their social responsibility and could not evade this
outcome. As evidenced by the increased inflation rate during dirigisme, this was less than
ideal. Much like President Mitterrand, the government was trapped by their promise of
social protection provisions, not allowing them any room to return to an interventionist
society and reallocate financial capital to invest in long-term economic growth.
One analyst argues, however, that the French were playing a “dirigiste long
game”, stating that, despite the EU’s push for the dismantling of dirigisme, France has
been slowly planting seeds to maintain some of its regulatory control and that dirigisme
still exists today (Clift, 2006). Clift’s view of French policymakers is one that portrays
them thinking about the long run outcome of building credibility with the EU while still
making moves toward independent, government regulated policies. Though France has
assumed the role of the degenerate of the EU by refusing to adhere to regulations and
deficit rules, I stand with Levy in arguing that dirigisme was virtually non-existent after
the 1983 U-turn (Levy, 2005) and herein lies the problem France is faced with today.
While we believe that the market will effectively allocate resources, set prices, and
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23
produce economic growth, France’s case demonstrates that when government
intervention stopped, their situation worsened and the market capitalist orientation did not
actually help the economy to mend itself.
French economist Élie Cohen stated “…history has taught us that the visible hand of
the state has played a significant role every time an economy has taken off.” (Cohen,
2007) This is consistent with what I believe, in looking at the trajectory of the French
economy. The government previously had holdings in all industry, promoting extensive
growth procedures, but they surrendered that role when they joined the EU. Cohen
further argues, “R&D or technology policy tends to create positive externalities of the
whole economy” (Cohen, 1995; Cohen, 2007). What this means is that resources put into
research and development, as well as technology are important to induce economic
growth. Unfortunately, however, the French government stopped funding these two areas
and significantly reduced the bailout budget for struggling industries, stunting growth and
increasing unemployment. Furthermore, in the world we live in, a generally accepted
concept is that continual innovation is necessary for a healthy economy and efficient
competition, but the government has no capacity to finance this area even though it
would surely increase production and promote economic growth.
The high levels of unemployment and government deficit in conjunction with the low
level of economic growth have rendered a stagnating French economy. Though
stagnation is generally evitable, because of the augmented expectations of French
citizens, fueled by continual pacification measures and social acquiescence, the
government is paralyzed and reforms are impossible. Some researchers have argued that
eventually an administration will “bite the bullet” and make the necessary reforms.
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However, the economy entered stagnation in 2002 and it has endured until today as
shown in Figure 3.1 below.
Figure 3.1
5
Annual Growth Rate (%)- 2000-2015
4
3
2
1
0
-1
-2
-3
-4
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
(Data source OECD)
Conclusion and Suggestions for Further Research
History has shown that since 1968, France made a series of short-term beneficial,
but long-term detrimental economic and policy decisions to arrive at the current
economic state. It is evident that France once had the capacity to sustain a prosperous
economy during the period of industrial focus and government intervention. Granted,
with the reparations necessary to repair the devastated economy post-World War II, it
was not difficult to gain support for industrial investment. However, that has long since
disappeared. Changing the investment decisions and subsequently the policy direction
were the steps that led to the 1983 U-turn and the difficulty in turning back. This raises
the question of whether or not France can or should revert to dirigiste policy measures.
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As previously mentioned, the economic assumption is that the market can “fix”
itself was undermined by France’s demonstrated rapid economic growth during the
period in which the government was the guiding force of economic activity. Granted, one
must take into account the post-war context when considering the efficacy of dirigisme as
the war caused the destruction of France’s capital stock. Because the state’s capital
holdings were severely depleted, the rate of return on their investment into industry was
very high, which prepared the economy for rapid economic growth. Now, however, the
capital stock in France has increased, and as observed by the developing/developed
country output dichotomy, investments might not ultimately produce the same rate of
return. The economy experienced these effects when François Mitterrand realized the
difficulties in resource reallocation when trying to save the floundering industries toward
the end of dirigisme, after the amount of capital the state possessed had already increased.
While I think that, contrary to the economic assumption, the government can recreate the
once efficient allocation of resources to revitalize the French economy; given
Mitterrand’s experience I do not believe that it would be possible. I do, however, believe
that this could be a way to patch the current holes in France’s economic system.
This thesis simply furnished an explanation for the stagnant state of the French
economy through a historical meta-analysis of economic transformations. However, an
issue left untreated is the resolution of this problem. This is a point of further research to
be conducted in the future. While I believe that there is no current solution as the
continual misallocation of resources prevents the government from enacting effective
policy reforms, the rate at which the world and economic systems are changing might
present a “fix” in the future. Moreover, the government’s perpetual fear of another social
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uprising, as a result of that under DeGaulle in 1968, is limiting the authoritative power
that the administrations once had. Each politician has attempted to implement changes,
but each change has caused a social uprising and has led to the government backing down
and acquiescing the demands of French citizens. Therefore, administrations are paralyzed
and no change will be effectively implemented to pull the economy out of stagnation.
Despite my bleak outlook about France’s economic stagnation, other researchers
maintain hope because France always finds a way to stay afloat. The lack of policy
changes is not sustainable in the face of the world’s changing economic system and
future generations will be the ones to realize this fact. For now, based on my
conversations with a few French residents, they all choose to ignore the glaring problem
of economic stagnation, stating that what I am suggesting is that France’s economy is
failing. My concern is not that France’s economy will flounder, but rather that it will lose
its position among the global competitors. And, unfortunately, it seems that that position
is not likely to change in the foreseeable future.
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Vasavada, 2015
2006
2007
2008
2009
2010
2011
2006
2007
2008
2009
2010
2011
2014
2005
2005
2014
2004
2004
2013
2003
2003
2013
2002
2002
2012
2001
2001
2012
2000
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
2000
0
1999
1
1999
2
1998
3
1998
4
1997
5
1997
6
1996
7
1995
8
1996
9
1995
10
1994
Annual Inflation Rate (%)
1994
Figure A.2
1993
(Data Source OECD)
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
Appendix
Figure A.0
Unemployment Rate (%)
14
12
10
8
6
4
2
0
(Data Source OECD)
i
Figure A.3
Government Expenditure vs. Government Revenue (euro, millions)
1400000
1200000
1000000
800000
Expenditure
600000
Revenue
400000
200000
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0
(Data Source OECD)
Figure A.4
Inflation Rates in Western Europe (%)- 90's
6
5
4
Austria
Belgium
France
3
Germany
Luxembourg
2
Netherlands
1
0
1989
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
(Data Source OECD)
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Figure A.5
Annual Growth Rate (%)- End of Dirigisme
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
1978
1979
1980
1981
1982
1983
1982
1983
(Data Source OECD)
Figure A.6
9
Unemployment Rate (%)- End of Dirigisme
8
7
6
5
4
3
2
1
0
1978
1979
1980
1981
(Data Source OECD)
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iii
Figure A.7
Government Expenditure vs Revenue (Euro, Millions)- Social Pacification
900000
800000
700000
600000
500000
Expenditure
400000
Revenue
300000
200000
100000
0
(Data Source OECD)
Figure A.8
4
Annual Growth Rate (%)- Stagnation
3
2
1
0
-1
-2
-3
-4
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
(Data Source OECD)
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2015
Figure A.9
12
Unemployment Rate (%)- Stagnation
10
8
6
4
2
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
(Data Source OECD)
Figure A.10
Government Expenditure vs Revenue (Euro, millions)- Stagnation
1400000
1200000
1000000
800000
Expenditure
600000
Revenue
400000
200000
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(Data Source OECD)
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